Under the sword of the ‘Washington Consensus’

cc. Thirty-five years after the end of the Warsaw Pact and the Council for Mutual Economic Assistance, COMECON, it is increasingly clear that the West’s conduct and rhetoric following the end of the Cold War require thorough review and discussion. It is advisable to give a voice to those who were contemporary witnesses and, in a certain sense, also “victims” of highly problematic political and economic decisions made after 1990. Arne C. Seifert, a former ambassador representing the German Democratic Republic, is a very competent contemporary witness and for many years has been making valuable contributions to this necessary discussion.
    The article published here, on trans-Atlantic strategies for expanding and maintaining power, as well as their alternatives, is the first of a three-part series. In forthcoming issues of Current Concerns, Part 2 will address NATO’s eastward expansion and the CSCE process; in Part 3 Seifert looks at the “Cold War of values.”
    Note: All quotations are from the German editions of the books cited and are translated back into English.

After the end of the Cold War in 1990, the West and, with particular commitment, the Federal Republic of Germany, immediately moved into the geopolitical spaces of the failed Soviet sphere of influence. They developed “shock” strategies – euphemistically termed transformation strategies – with a comprehensive aim, namely, to encompass all economic, political, and social systems in that area and integrate them simultaneously into the Western neoliberal market model. The guiding doctrine for the economic and socio-political transformation of the former socialist space, developed within the framework of the “Washington Consensus,” plunged its states and economies into turmoil, the repercussions of which are still felt today.
    Scholarly policy advice from German authors likewise promoted the universality and radicalism of Western political and social transformation demands. They recommended “simultaneity” in the establishment of “a new economic order, a new legal and constitutional order, and new rules of social integration, i.e., installing rules of social recognition and affinity on a large scale encompassing entire societies.”¹ They also urged “complexity of change as a simultaneous, extremely condensed in time, and also conflict-ridden transformation of national substance, of internal conditions (economy, society, and politics), and international appraisal and integration.”² The political position that the West should steer the transformation processes in the post-Soviet space was expressed, for example, in the postulate that “the only condition under which a market economy and democracy can be implanted and flourish simultaneously is that both are imposed on a society from the outside and guaranteed for longer periods by means of international dependencies.”³

‘Transformation’ as Shock Therapy

Even Chancellor Helmut Kohl still argued that a general transformation of the system of “post-socialist” states and their populations was planned from the outset as “shock therapy” and not as a transformation into “flourishing landscapes.”
    “Shock therapy” was the working title of a “consensus” that “reflected agreement between the 15^th and the 19^th Streets in Washington, the US Treasury Department, the IMF and the World Bank, influential think tanks, a prominent majority of academics, media representatives and, above all, capital interests.”⁴
    The Canadian author Naomi Klein clarified in her book, The Shock Doctrine: The Rise of Disaster Capitalism,⁵ that the new global economic dimensions arising with the end of the Soviet empire meant that “with the end of the Soviet empire, the market now had a global monopoly.”⁶ In 1993, Klein wrote, “enough finance ministers and central bank governors to warrant holding a major economic summit openly discussed the idea of actively creating a serious crisis [in the transition countries] in order to push through shock therapy.” One of the arguments was that “only countries that are truly suffering, that are shocked, submit to shock therapy.”⁷
    Joseph Stiglitz, the Nobel laureate in economics, a member of President Clinton’s Council of Economic Advisers beginning in 1993 (and chairman of the CEA until he was forced out in 2000), chief economist and senior vice-president of the World Bank with access to the politics and practices of the International MonetaryFund, stated in Globalization and Its Discontents, that “shock therapy” as a “stabilisation, liberalisation, and privatisation program was, of course, not a growth program. […] It created the conditions for decline.”⁸
    In the same work Stiglitz posed the question, “Who ruined Russia?” and answers it with a clear assignment of responsibility: “The economic policy guidelines of the ‘Washington Consensus’ resulted in a mis-implemented privatisation that did not lead to surges in efficiency and growth, but led to broken-up businesses and a decline in production. […] What was most important to the IMF was the number of firms that were transferred to the private sector, regardless of the method. Almost everything else was secondary.” In consequence, Stiglitz observed, “Russia quickly went from being an industrial giant to a raw materials exporter.” He added, “The haste ordered by the West allowed an elite led by international bureaucrats […] to impose rapid changes on a dissenting population.”
    Here is Stiglitz’s summation of this strategy:
    “The result was a market economy in which many former party apparatchiks were simply given expanded powers to manage and dismantle enterprises they had already run in the communist era, and in which former KGB officers still held the levers of power. A new dimension emerged: a few new rulers wielded enormous political and economic power…. There was a ‘new’ post-communist revolution in Russia.”
    As far as these are concerned, Stiglitz explains that “the IMF’s haste was driven no less by political motives”. The “powerful class of oligarchs” that created the government “worked hard to ensure Yeltsin’s re-election.” “The ‘loans-for-shares’ scheme [of the IMF] constituted the final stage of the enrichment of the oligarchs, […] who came to dominate […] the political life of the country.” The high-ranking American and IMF officials “focused on keeping their friends Boris Yeltsin and the so-called ‘reformers’ in power.”

Privatisation of the East German economy as ‘shock therapy’

The history of the years after 1990 has shown that even the abrupt, shock-like introduction of the neoliberal market economy in East Germany by the West German government, in the framework of “shock therapy,” did not deliver the immediate positive economic consequences promised to the citizens of the GDR and the new federal states.
    The opposite occurred: The consequences of the “transformation” of the East German economy, implemented by the West German government through an agency with the misleading name “Treuhand*” (“Safekeeping”), unfolded at a pace no less “shocking” than that of the Russian case.
    The same applies to the resulting “shock privatisation” of almost 11,000 East German companies and business units from July 1990 to December 1992. “In the course of privatisation, around 68 per cent of jobs were lost,” Jörg Roesler wrote in War der Ansatz der Treuhand eine Alternative? “Of the 4.1 million jobs in the ‘Treuhand empire’ in mid-1990, no more than around 1.3 million jobs remained in the privatised companies still under the ‘Treuhand’ umbrella by the end of 1992.” In sum, the number of people employed in East Germany’s manufacturing sector fell from more than 3.2 million in 1989 to around 750,000 by the end of 1992.”⁹

Miscalculation

The “Washington Consensus” for the systemic transformation of formerly socialist social systems into market-based, neoliberal ones by means of an eco-social shock therapy has today proved itself to have been a serious miscalculation. The equation “loans-for-shares” = political gain (in this case, Yeltsin’s installation) did not work out with regard to the West’s global dominance. Instead, the “consensus” generated a post-communist understanding of the assertion of power under the conditions of the transition to a market economy, in which the fastest and most irreversible possible transfer of political power into property was considered the key issue. Consequently, political power was also conceived of as a kind of property. This gave rise to a specific type of “clan-bureaucratic” capitalist and political power elite, as well as a kind of capitalism that now stands in the way of the West’s central objectives – however one may judge those objectives.

In sum

The West continues to be thoughtlessly taken in by its own miscalculations. After 1990, it immediately ventured into the geopolitical spaces of failed Soviet hegemony. The West’s approach was based on the assumption that a market-liberal system, once installed by the West, would at the same time open Russia, the post-Soviet space as far as Central Asia,¹⁰ and the Eastern European states also to its institutional and normative systems of rule. “The collapse of the Soviet Union [triggered] a fatal triumphalism in the West,” as Habermas observed in Zur Verfassung Europas. “The feeling of having been vindicated in world history has a seductive effect.”¹¹
    The West’s expectations proved naive, however, and it acted as if everything were determined solely by the will of the players. Even at that time, it was sufficiently clear and well-known that economically and politically diverse national and regional economies clashed in the world markets. Added to this was the increasing dominance from outside, from beyond the boundaries of national economies. This particularly concerns the regulation of capital flows by internationally operating capitalist powers that are no longer oriented towards the national economy and the common good, but rather represent the interests and ideology of an internationalist Western financial world.
    These values, according to Stiglitz, have undermined the “glue” that holds society together, the “social capital.” By “undermining,” Stiglitz primarily means “privatisation” and the way in which the change to a market-based system was implemented under the pressure of shock therapy in Russia and many of the former satellite states of the Soviet Union: “The social contract, which bound citizens together with their government, was broken, as pensioners saw the government giving away valuable state assets, but claiming that it had no money to pay their pensions.”¹²•

* The Treuhandanstalt (Treuhand for short) was an agency founded in 1990 to privatise, restructure, or close approximately 8,000 state-owned enterprises, VEBs, in the GDR to facilitate the transition to a market economy. It sold thousands of companies, which led to mass unemployment and deindustrialisation.

¹ Offe, Claus. Der Tunnel am Ende des Lichts, Erkundungen der politischen Transformation im Neuen Osten. (The Tunnel at the End of the Light: Explorations of Political Transformation in the New East). Campus Verlag, Frankfurt/Main, New York, 1994, p. 19.
² Federal Institute for East European and International Studies (ed.). Der Osten Europas im Prozess der Differenzierung (Eastern Europe in the Process of Differentiation). Carl Hanser Verlag Munich Vienna, 1997, p. 13.
³ Offe, Claus. Der Tunnel am Ende des Lichts, Erkundungen der politischen Transformation im Neuen Osten. (The Tunnel at the End of the Light: Explorations of Political Transformation in the New East). Campus Verlag, Frankfurt/Main, New York, 1994, p. 65.
⁴ Marangos, John. Was Shock Therapy Consistent with the Washington Consensus? Department of Economics, Colorado State University, Comparative Economic Studies, 2007, 49, pp. 32–58); www.researchgate.net/publication/5219030; Naomi Klein. Die Schocktherapie – Der Aufstieg des Katastrophen-Kapitalismus. Frankfurt/M 2007 (The Shock Doctrine: The Rise of Disaster Capitalism).
⁵ Klein, Naomi. Die Schocktherapie – Der Aufstieg des Katastrophen-Kapitalismus. (The Shock Doctrine: The Rise of Disaster Capitalism). Frankfurt/M 2007.
⁶ Stiglitz, Joseph. Die Schatten der Globalisierung. (Globalization and Its Discontents.) Goldmann, 2004.
⁷ Klein, op. cit.
⁸ Stiglitz, op. cit.
⁹ Roesler, Jörg. War der Ansatz der Treuhand eine Alternative? (Was the Treuhand Approach an Alternative?) Helle Panke, Berlin 2019.
¹⁰ The People’s Republic of China rejected all the West’s offers of “transformation assistance.”
¹¹ Habermas, Jürgen. Zur Verfassung Europas. (On the Constitution of Europe). Suhrkamp Berlin, 2011, p. 103.
¹² Stiglitz, op. Cit.

* Dr Dr h. c. Arne Clemens Seifert (born 1937 in Berlin), Ambassador (ret.), Senior Research Fellow, WeltTrends-Institute for International Politics, Potsdam. Studied at the Institute for International Relations, Moscow, specialising in Turkey, Iran, and Afghanistan, graduated in 1963. Received his doctorate at the Institut für Internationale Arbeiterbewegung (Institute for the International Workers’ Movement), Berlin, in 1977. Received an honorary doctorate from the Orient Institute of the Russian Academy of Sciences in 2017. Served in the Ministry of Foreign Affairs of the GDR from 1964 to 1990: Arab States Division, working on the ground in Egypt and Jordan. Head of the sector for Iraq, Iran, and Afghanistan; Research Associate to the Deputy Minister for Asia and Africa; Ambassador to Kuwait 1982–1987; Head of Department 1987–1990. After 1990: OSCE Mission to Tajikistan; Central Asia Advisor at the Center for OSCE Research (CORE), Institute for Peace Research and Security Policy at the University of Hamburg, specialising in OSCE and Central Asia research – civilian conflict prevention, transformation, political Islam, secular-Islamic relations, and political processes. Recent publications include: Dialog und Transformation – 25 Jahre OSZE- und Zentralasienforschung, (Dialogue and Transformation – 25 Years of OSCE and Central Asia Research), Nomos; Islamischer Aufbruch in Zentralasien – Spezifika religiöser Radikalisierungsprävention, (Islamic Awakening in Central Asia – Specifics of Religious Radicalisation Prevention), OSCE Yearbook Vol. 24, 2018; Friedliche Koexistenz in unserer Zeit – Der neue Kalte Krieg und die Friedensfrage, (Peaceful Coexistence in Our Time – The New Cold War and the Question of Peace), WeltTrends 2021. “Regelbasierte internationale Ordnung” versus post-koloniale Emanzipation – Grenzen und Sackgassen eines globalen Hegemonieprojekts, (“Rules-based international order” versus post-colonial emancipation – limits and dead ends of a global hegemony project), World Trends 2022